Holding

The relevant date for valuation of a retiring partner’s share is the date on which the partner ceases to be a partner, and the unpaid amount constitutes a debt payable with interest under Section 37 of the Partnership Act.

Summary

Pamuru Vishnu Vinodh Reddy (the plaintiff) retired from the partnership firm Vijay Mahal Theatre on 5 April 1971 by selling his 25% share, but the other partners failed to pay the agreed consideration. After his death, his son filed a suit for dissolution and accounting of the partnership assets. The trial court appointed a Commissioner to value the share and held that the valuation date was the relevant date. The Andhra Pradesh High Court reversed this, holding that the relevant date is the date of retirement, 5 April 1971, and directed the trial court to determine the value and interest thereon. The Supreme Court affirmed the High Court, stating that once a partner retires, his share becomes a debt payable from the date of retirement, with interest under Section 37 of the Partnership Act, and that non‑payment of consideration does not affect the retirement. Consequently, the appeal was dismissed.

Issues considered

The appropriate date for ascertaining the value of a retiring partner's share under the Partnership Act, 1932 – whether it is the date of retirement or the date of the Commissioner's valuation.
Whether the plaintiff had effectively retired on 5 April 1971, thereby ceasing to be a partner and losing rights to future profits.
Whether the failure to pay the agreed consideration alters the legal effect of retirement and the entitlement to interest under Section 37.

Legislation cited

Indian Partnership Act, 1932s. 32, s. 37, s. 48

Subjects

partnershipretirement of partnervaluation of shareSection 32Section 37debtinterestcause of actionreconstitution of firmdissolution

Judgment

PAMURU VISHNU VINODH REDDY A
v.
CHILLAKURU CHANDRASEKHARA REDDY AND ORS.

FEBRUARY 17, 2003

[SHIVARAJ V. PATIL AND K.G. BALAKRISHNAN, JJ.] B

Partnership Act, 1932-Sections 32 and 37-Share of the retiring
partner-Ascertainment-Relevant date-Date of retirement or the date on
which Commissioner made valuation of the share-Held: Relevant date for C
ascertainment of retiring partner's share is the date on which he ceased to be
a partner since cause of action for the retiring partner arose on the date of
his retirement from p.:irtnership firm and on this date liability of other partners
also arose.

Plaintiff-retiring partner filed suit for dissolution and accounting of D
partnership assets of the firm after retirement. The suit was decreed. In
the first appeal, High Court set aside the decree and directed the
defendant-other partners to pay amount .due (o plaintiff towards his share
in the assets of the firm without resorting to sale of such assets. It .also
directed to decide date for valuation of plaintifrs share. Thereafter, SLP E
was filed which was dismissed as withdrawn. Trial Court then appointed
a Commissioner. Thereafter appellant-plaintifPs son filed an application
for deciding the date on which valuation of plaintifrs share was to be made
since the plaintiff expired. District Judge allowed the application holding
that the date on which Commissioner values the property would be the
relevant date. However, the High Court held that relevant date was the F
date on which plaintiff ceased to be a partner. Hence the present appeal

Appellant contended that the High Court was not justified in
reversing the order of the trial court; that the date on which the
Commissioner valued the property of the partnership firm as the relevant
date for ascertaining the value of the share of the plaintiff in the firm; G
that the High Court committed an error in holding that the plaintiff had
admittedly retired from the partnership firm on 5.4.1971, the date on
which an agreement to sell his share was entered into although neither
the value of the share was ascertained nor was it paid till date; that the

57 H
58 SUPREME COURT REPORTS [2003] 2 S.C.R.
A High Court in the first appeal granted relief of rendering of accounts of
partnership firm from S.4.1971 till date itself indicated that the plaintiff
continued to be partner of the firm; and that the share of the plaintiff
was being utilized by the partnership firm and had earned profits.

Dismissing the appeal, the Court
B
HELD: I.I. The plaintiff had retired from the firm on S.4.1971 after
selling his share in the partnership firm. Once he had retired from the
firm, he had no right to claim any further share in the profits of the firm.
A finding of fact is also recorded that the defendants had not paid the
C value of the share of the plaintiff pursuant to the agreement for retiring
from the firm. If the defendants have failed to pay the value of the share
of the plaintiff as agreed to, it has become a debt on the defendants and
the plaintiff is entitled to recover the same with interest. After the
retirement from the partnership firm and particularly when the firm was
reconstituted with new partners, there was no question of using the
D plaintifrs share for earning profit in the reconstituted firm: [66-A, BJ

1.2. There is no nexus or reason to say that the relevant date for
valuation of the share of the plaintiff is the date when the Commissioner
valued his share, that too after long lapse of time and taking note of the
E events that the plaintiff had retired from the firm on S.4.1971 having sold
his share and the firm had been reconstituted with new partners. When
the plaintiff retired from the partnership firm on S.4.1971, his share could
be valued as on that date which stands to reason. Once the valuation is
made as on that date, for any delay in payment he is to b~ compensated
by awarding interest as is evident from Section 37 of the Partnership Act
F itself. The value of the share of the plaintiff on the date of his retirement
from the firm could be regarded as a pure debt with effect from the date
on which he ceased to be a partner as per the agreement entered into
between the parties. Otherwise the result would be that he was deemed to
have been continued as partner of the firm even after he retired from the
G firm by selling his share. If consideration was not paid as per the
agreement, he could enforce it as per law. However, mere non-payment
of consideration does not take away the legal effect of retirement from
the partnership firm. [66-D, E, F)

1.3. The cause of action for the plaintiff arose on the date of his
H retirement from the partnership firm and on which date the liability of
P.V.V .. REDDY v. C.C. REDDY [SHIVARAJ V. PATIL, J.] 59

-· the defendants also arose. In this view, the plaintiff could certainly claim
the value of his share as on the date on which plaintiff ceased to be a
partner with interest till the payment was made. The view of the trial court
A

that the relevant date to value the share of the plaintiff is as on the date
of the Commissioner's report cannot be accepted, as there was no nexus
between the date of retirement of the plaintiff from the firm and the date B
of Commissioner's report. The date of Commissioner's report may be

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'\
fluctuating, i.e., it could be earlier or later in the absence of any time-
frame. Thus the High Court was right and justified in passing the
impugned order upsetting the order of the trial court. [67-H; 68-A, 8)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6519 of 1994. C

From the Judgment and Order dated 15.6.1994 of the Andhra Pradesh
High Court in C.R.P. No. 3210 of 1993.

M.N. Rao., K. Maruthu Rao and Mrs. K. Radha for Guntur Prabhakar
for the Appellant. D
P.S. Narasimha and A. Bhattacharyya for the Respondents.

J The, Judgment of the Court was delivered by

SHIVARAJ V. PATIL J. The few facts which are relevant and E
necessary for disposal of this appeal in brief are that one Pamuru Rama
Subba Reddy filed the suit O.S. No. 126 of 1976 for dissolution and accounting
of the partnership assets of the firm Vijay Mahal Theatre. The defence set up
to resist the suit was that the plaintiff and the 4th defendant retired from the
firm in the year 1971 and, therefore, the plaintiff was not entitled to seek p
dissolution of the partnership and the settlement of the accounts. The suit was
decreed. In the first appeal, the High Court affirmed the findings of the trial
L court; however, set aside the decree for dissolution of the firm and directed
the defendants to pay the amounts due to the plaintiff towards his share in
the assets of the firm on valuation without resorting to the sale of the assets
of the firm. The High Court directed the trial court to make an enquiry into G
the valuation and to decide the date on which the valuation of the plaintiffs
share shall be arrived at taking into account that the plaintiffs share was not
paid to him. Against the said judgment of the High Court, special leave
petition was filed before this Court which was dismissed as withdrawn in
19~. H
)

60 SUPREME COURT REPORTS [2003) 2 S.C.R.

A The first defendant died during the pend ency of the suit and defendants
7 to 11 were added as his legal representatives. M. Subbareddy to whom the
share of the plaintiff was said to have been transferred was impleaded as 12th
defendant to the suit as per the directions of the High Court. During the l!i
pendency of the enquiry into the valuation of the plaintiffs share in the
B assets of the partnership firm, the plaintiff died and his minor son Pamuru
Vishnu Vinodh Reddy, represented by his natural guardian was added as the
legal representative of the deceased plaintiff.

The trial court, pursuant to the directions given by the High Court,
appointed a Commissioner for ascertaining the value of the share of the
C plaintiff as on the date and also as on 5.4.1971. Thereafter, the son of the _...
deceased plaintiff (appellant herein) filed I.A. No. 270of1987 to decide the
date on which the valuation of the plaintiffs share was to be made before the
Commissioner proceeds to hold an enquiry as per the directions of the High
Court. The learned Addi. District Judge, after hearing the.parties, allowed the
said application holding that the date on which the Commissioner values the
D property was the relevant date to ascertain the valuation of the plaintiffs
share in the partnership firm. The 3rd defendant, being aggrieved by the said
order, filed a revision petition before the High Court. The High Court allowed
the revision petition, set aside the order of the learned Addi. District Judge
and held that the relevant date for the purpose of ascertaining the value of the
E · share of the plaintiff was the date on which he ceased to be a partner, observing
that if the latter date than the date on which the plaintiff ceased to be a
partner was taken for the purpose of ascertaining the value of his share, it
would confer unjustified windfall on the outgoing partner and it would be
inconsistent with the concept of retirement or expulsion. The son of the
original plaintiff who was the respondent no. I in the revision petition before
F the High Court, aggrieved by the order made by the High Court, is before
this Court in this appeal challenging the validity and correctness of the
impugned order.

The short question that arises for consideration in this appeal is as to
G which is the relevant date for the purpose of ascertaining the value of the
share of the plaintiff in the partnership firm i.e. whether 5.4.1971 or the date
on which the Commissioner made the valuation of the share of the plaintiff.

Shri M.N. Rao, the learned Senior Counsel on behalf of the appellant
contended that the High Court was not justified in reversing the order of the
H trial court declaring that the date on which the Commissioner valued the
P.V.V. REDDY v. C.C. REDDY [SHIVARAJ V. PATIL, J.] 61

property of the partnership finn as the relevant date for ascertaining the value A
of the share of the plaintiff in the firm; the High Court failed to appreciate
that the trial court had recorded a finding taking note of the observation of
the Division Bench judgment of the High Court dated 24.11.1983 passed in
A.S. No. 481/79 to the effect thatthe trial court while deciding the relevant
date for ascertaining the value of the share of the plaintiff shall take into B
account the fact that the value of his share had not been paid. He added that
the High Court by the said judgment dated 24.11.1983 had modified the
decree of dissolution of the partnership firm granted by the trial court only
on the ground of equity to allow the partnership finn to carry on its business
and granted the decree for accounting and also for the payment of value of
plaintiff's share of 25% in the said finn; in that view, the relevant date for C
.ascertaining the v~lue of the share of the plaintiff can only be the date on
which the Commissioner valued the properties of the partnership finn. He
further submitted that the High Court committed an error in the impugned
order in holding that the plaintiff had admittedly retired from the partnership
finn on 5.4.1971, the date on which an agreement to sell his share was
entered into although neither the value of the share was ascertained nor was D
it paid till date; the fact that the High Court in the judgment dated 24.11.1983
made in the first appeal granted relief of rendering of accounts of partnership
finn from 5.4.1971 till date itself clearly indicated that the plaintiff continued
to be partner of the finn. It was further submitted that the High Court ought
to have appreciated that the share of the plaintiff was being utilized by the E
partnership finn and had earned profits and in such circumstances the relevant
date for valuing the share of the plaintiff should have been the date when the
Commissioner ascertained the. value of ~e assets of the firm.

In opposition, the learned counsel for the respondents made submissions
in support and justification of the impugned order supporting the same for F
the very reasons recorded in the impugned order elaborating them and pointing
out certain factual aspects.

In order to appreciate the rival contentions touching the controversy
raised by the parties, we feel it necessary to state few more facts as can be G
gathered from the judgment of the High Court in A.S. No. 481/1979.

Partnership with the plaintiff as per Exbt. B/7 was admitted in the
written statement but it was contended that the plaintiff and the 4th defendant
gave up their shares and retired from the partnership; the plaintiff transferred
his share to M. Subbareddy and the same was evidenced by Exbt. B/21 dated H
I
62 SUPREME COURT REPORTS [2003] 2 S.C.R.

A 5.4.1971; since Exbt. B/21 was not filed before the income tax authorities, a
fresh deed was executed on 9.11.1971 which was also attested by the plaintiff
and the 4th defendant wherein the wife of the second defendant was also
taken as a partner; the plaintiff denied the attestation of Exbts. B/21 and B/
22; they were sent to the expert; the trial court found that attestation of the
two documents by the plaintiff was proved but held that the plea set up by
B the defendants that the plaintiff was paid his share and the account was
settled was not accepted; in that view, the trial court held that the plaintiff
continued to be the partner of the firm and consequently, decreed the suit for
dissolution; the auditor who was examined as DW-3 in the case was common
for both-the plaintiff and the defendants; the High Court having considered
C both documentary and oral evidence, concluded that the plaintiff had agreed
to sell his share and the agreement was binding on him and that it was
affirmed twice both in Exbts. B/21 and B/22. The High Court affirmed the
finding that no payment was made to the plaintiff as agreed. It was also
found that the plaintiff retired on 5.4.1971 with the consent of all the partners.
D The relevant portions of the said judgment in A.S. No. 481/1979 read as
under:-

"Once we hold that the retirement was obtained by consent of all
partners Section 32(a) of the Partnership Act is attracted and a
retirement with the consent of all the other partners can be effected
E without dissolution. The failure on the part of the remaining partners
to settle the accounts of the retiring partner would make them liable
for the decree for accounting ........... Hence we do not see any infinnity
a
in granting decree for accounting including delivery of the share of
the plaintiff without dissolution of the firm as such.

F In fact we have adjourned the case to enable the parties to come to
an agreement regarding the value of the share of the plaintiff and also
the amount due to him towards profits. But since there is no agreement
between the parties, we have to proceed to our judgment.

G
Hence we have no hesitation to pass a decree for directing delivery
of the share of the plaintiff.

xx xx xx xx xx xx xx xx xx xx xx xx xx
H
P.V.V. REDDY v. C.C. REDDY [SHIVARAJ V. PATIL, J.] 63
Accordingly, we set aside the decree for dissolution and direct a A
preliminary decree directing accounting against defendants 1 to 5
from 5.4.1971 and also for the payment of the value of the plaintiffs
share of 25% in the suit firm. The Court below should determine the
value of the share of the plaintiff. The learned counsel for the plaintiff
requested to give a direction regarding the date on which the valuation B
of the plaintiffs share shall be arrived at. However, as we are directing
the trial court to make enquiry into valuation, we shall direct the trial
court itself to decide date taking into account that his share was not
paid till now ....................... "

We think it necessary to notice Sections 32, 37 and 48 of the Indian C
Partnership Act which read:-

"32. Retirement of a partner -(1) A partner may retire,-

(a) with the consent of all the other partners,
D
(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all
the other partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any E
third party for acts of the firm done before his retirement by an
agreement made by him with such third party and the partners of the
reconstituted firm, and such agreement may be implied by a course
of dealing between such third party and the reconstituted firm after
he had knowledge of the retirement. F

(3) Notwithstanding the retirement of a partner from a firm, he and
the partners continue to be liable as partners to third parties for any
act done by any of them which would have been an act of the firm
if done before the retirement, until public notice is given of the
retirement: G

Provided that a retired partner is not liable to any third party who
deals with the firm without knowing that he was a partner.

(4) Notices under sub-section (3) may be given by the retired partner H
64 SUPREME COURT REPORTS [2003) 2 S.C.R.

A or by any partner of the reconstituted finn."

"37. Right of outgoing partner in certain cases to share subsequent
profits-Where any member of a firm has died or otherwise ceased
to be a partner, and the surviving or continuing partners carry on the
business of the finn with the property of the finn without any final
B settlement of accounts as between them and the outgoing partner or
his estate, then, in the absence of a contract to the contrary, the
outgoing partner or his estate is entitled at the option of himself or
his representatives to such share of the profits made since he ceased
to be a partner as may be attributable to the use of his share of the
c property of the finn or to interest at the rate of six per cent per annum
on the amount of his share in the property of the finn;

Provided that whereby contract between the partners an option is
given to surviving or continuing partners to purchase the interest of
a deceased or outgoing partner, and that option is duly exercised, the
D estate of the deceased partner, or the outgoing partner or his estate,
as the case may be, is not entitled to any further or other share of
profits; but if any partner assuming to act in exercise of the option
does not in all material respects comply with the tenns thereof, he is
liable to account under the forgoing provisions of this section."
E
"48. Mode of settlement of accounts between partners-In settling
the accounts of a firm after dissolution, the following rules shall,
subject to agreement by the partners, be observed:-

(a) losses, including deficiencies of capital, shall be paid first out of
F profits, next out of capital, and, lastly, ifnecessary, by the partners
individually in the proportions in which they were entitled to
share profits;

(b) the assets of the finn, including any sums contributed by the
partners to make up deficiencies of capital, shall be applied in the
G following manner and order:-

(i) in paying the debts of the finn to third parties;

(ii) in paying to each partner rateably what is due to him from
the firm for advances as distinguished from capital;
H
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P. V. V. REDDY v. C.C. REDDY [SHIV ARAJ V. PATIL, J] 65

(iii) in paying to each partner rateably what is due to him on A
account of capital; and

(iv) the residue, if any, shall be divided among the partners in
the proportions in which they were entitled to share profits."

Use of the word 'retire' in Section 32 of the Act is confined to cases where B
a partner withdraws from a firm and the remaining partners continue to carry
on the business of the firm without dissolution of partnership as between
them. Where a partner withdraws from a firm by dissolving it, it shall be
dissolution and not the retirement. Retirement of a partner from a firm does
not dissolve it, in other words it does not determine partnership inter se C
between all the partners. It only severs the partnership between the retiring
partner and continuing partners, leaving the partnership amongst latter
unaffected and the firm continues with the changed constitution comprising
of the continuing partners. Section 32 provides for retirement of a partner but
there is no express provision in the Act for the separation of his share and
the intention appears to be that it would be determined by agreement between D
the parties. Section 37 deals with rights of outgoing partners. Although the
principle applicable to such cases is clear but at times some complicated
questions arise when disputes are raised between the outgoing partner or his
estate on the one hand and the continuing or surviving partners on the other
in respect of subsequent business. Such disputes are to be resolved keeping E
in view the facts of each case having due regard to Section 37 of the Act.
Section 48 deals with the mode of settlement of accounts between the partners
after dissolution of the partnership firm.

In this backdrop, now we take up the question for consideration set out
above. F

The findings as recorded by the High Court in A.S. No. 481/1979 that
the plaintiff has retired from the partnership firm on 5.4.1971 and that the
partnership firm had also been reconstituted thereafter, have attained finality.
In the same judgment, it is held that the plaintiff had agreed to sell his share G
and the agreement was binding on him as affirmed twice in Exbts. B/21 and
B/22. By the said judgment, the High Court set aside the decree granted by
the trial court for dissolution having regard to the fact that the plaintiff had
retired from the partnership firm and the reconstituted firm continued its
operations.
H
)
66 SUPREME COURT REPORTS [2003] 2 S.C.R.

A From these findings of fact, it is clear that the plaintiff had retired from
the finn on 5.4.1971 after selling his share in the partnership finn. Once he
had retired from the partnership finn, he had no right to claim any further
share in the profits of the finn. A finding of fact is also recorded that the
defendants had not paid the value of the share of the plaintiff pursuant to the
B agreement for retiring from the firm. If the defendants have failed to pay the
value of the share of the plaintiff as agreed to, it has become a debt on the
defendants and the plaintiff is entitled to recover the same with interest. After
the retirement from the partnership finn and partiCularly when the finn was
reconstituted with new partners, there was no question of using the plaintiffs
share for earning profit in the reconstituted finn. The High Court, despite
C specific request by the counsel for the plaintiff in A.S. No. 48111979 to give
a direction regarding the date on which the valuation of the plaintiffs share
shall be arrived at, did not give a direction but directed the trial court to make
inquiry into valuation and decide the date taking into account that his share
was not paid till then. There is no nexus or reason to say that the relevant
date for valuation of the share of the plaintiff is the date when the
D Commissioner valued his share, that too after long lapse of time and taking
note of the events that the plaintiff had retired from the finn on 5.4.1971
having sold his share and the firm had been reconstituted with new partners.
When the plaintiff retired from the partnership finn on 5.4.1971, his share
could be valued as on that date which stands to reason. Once the valuation
E is made as on that date, for any delay in payment he is to be compensated
by awarding interest as is evident from Section 37 of the Act itself. The value
of the share of the plaintiff on the date of his retirement from the finn could
be regarded as a pure debt with effect from the date on which he ceased to
be a partner as per the agreement entered into between the parties. Otherwise
the result would be that he was deemed to have been continued as partner of
F the finn even after he retired from the finn by selling his share. If consideration
was not paid as per the agreement, he could enforce it as per law. However,
mere non-payment of consideration does not take away the legal effect of
retirement from the partnership finn. The High Court in the impugned order
has observed thus: -
G
"It follows from the above that in cases where there is an agreement
to purchase share of partner, the value of the share of the outgoing
partner or retiring partner shall be ascertained on the basis of the
value on the date of the retirement, unless it is a case where the
valuation is directed by the Court in the exercise of its discretion, in
H which event, the relevant date will be the date on which the share is
\
x
P.V.V. REDDY v. C.C. REDDY [SHlVARAJ V. PATIL, J.] 67

actually valued. Admittedly, it is a case where the plaintiff had retired A
from the concern on 5.4.1971 and agreed to sell his share to Sri
M.Subbareddy. Therefore, there was an express agreement to sell the
share, pursuant to which, he sold his share to defendant no. 12 and
thereafter he retired and ceased to be a partner on 5.4.1971. If there
was delay in payment of his financial entitlement, he is entitled to B
interest at the rate of six per cent per annum in the property of the
firm. Section 37 of the Indian Partnership Act also says that in the
case of an outgoing partner, he is entitled to such share of the profits
made since he ceased to be a partner as may be attributable to the use
of.his share of the property of the firm or to interest at the rate of six
per cent per annum on the amount of his share in the property of the C
firm. The language used in Section 37 is that "since he ceased to be
a partner". In other words, since he ceased to be a partner, he is
entitled to interest at the rate of six per cent per annum on the amount
of his share in the property of the firm. Section 37 itself makes it
clear that the relevant date is the date on which he ceases to be a
partner. The proviso to Section 37 also says that if option is given to D
surviving partners to purchase the share of an outgoing partner and
if any partner assuming to act in exercise of the option does not in
all material respects comply with the terms thereof, he is liable to
account under Section 37.
E
Therefore, in any view of the matter, the .relevant date for the purpose

- of ascertaining the value of the share of the plaintiff is the date on
which he ceased to be a partner as it is a case where there was an
express agreement between the parties to sell the share of the plaintiff
in favour of Sri MSubbareddy and with effect from that date he
became a secured creditor and there was a debt due to him from the F
other partners who are continuing in the partnership business. It is
in the nature of a debt due to him or the amount due to him is unpaid
purchase money. Therefore, the relevant date is the date on which he
ceases to be a partner."

G
[emphasis supplied]

The cause of action for the plaintiff arose on the date of his retirement
from the partnership firm and on which date the liability of the defendants
also arose. In this view, the plaintiff could certainly claim the value of his
share as on 5.4.1971 with interest till the payment was made. The view of the H
68 SUPREME COURT REPORTS [2003] 2 S.C.R.

A trial court that the relevant date to value the share of the plaintiff is as on the
date of the Commissioner's report cannot be accepted, as there was no nexus
between the date of retirement of the plaintiff from the firm and the date of
Commissioner's report. The date of Commissioner's report may be fluctuating,
i.e. it could be earlier or later in the absence of any time-frame. In this view,
B the High Court was right and justified in passing the impugned order upsetting
the order of the trial court. We have every good reason to concur with the
finding recorded in the impugned order by the High Court. We find no merit
in the appeal. Consequently, it is dismissed. No. order as to costs.

N.J. Appeal dismissed.

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